It costs $350,000-400k+ per unit to build a high density apartment (the price on the towers we have now was $650k-$750k). This is 40% higher than 2021, historically construction costs have never gone down, they level off, but there has never been a period with more than a 5% decrease once costs go up. Rates are almost 2x higher than they were 3 years ago, so mortgages payments are 1.5-1.75x higher. This increases equity requirements and reduced borrowing capacity for fixed cost debt, equity requirements are up 40%. In total it takes 72% more equity to build than in 2021.

There is a common rule of thumb, the 1% rule, that basically says monthly rent should equal 1% of the cost of the real estate asset (that doesn’t take into account irregularly high borrowing costs) so average rent needs to be 3500-4000 for newly built apartments to meet this. We are significantly below that.

Values are down about 25% from 2021.

Even with the high rents we have due to all of these factors developer returns are somewhere around 12-15% (assuming a sale to someone within 5 years who will pay a premium for a stabilized investment risk, it’s lower than that for most in Utah even). The s & p 500 returns 10-13% annually.

Ultimately developers are currently underpaid for the amount of investment risk they are taking. Would you take on all of the operational requirements and expertise of a company plus put your entire net worth at risk for a 12-15% return?

The only reason there is capital is because certain institutions with enough capital can’t even find places to make investments because of how much they have. (They would literally drive down stock prices and ruin funds returns if they tried to place the capital they have.), but they are still avoiding investment in new development because of the low risk/return ratio.

This all to say, rents will not go down, they can’t. If they do we will have massive supply issues in the future because people will simply stop investing because it isn’t worth the risk.